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The Murky Side of Share Markets

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The shady share market practice of insider trading recently made the news headlines. There are also other schemes which may attempt to manipulate the prices of shares. How can small investors guard against such behavior?

Insider-Trading

Insider trading probably existed ever since there were financial markets. Insider-trading refers to the use of specific market-sensitive information that are not available to the general public, in order to profit from it. For example, company management or its bankers may have gained access to impending news of the acquisition of a company by another. Insider trading is said to occur if the “insider” uses this information to buy shares in the target company, before the news is made public. While it is illegal, insider trading is extremely difficult to prove.


In early November 2009, New York prosecutors brought to light a sophisticated insider trading ring on Wall Street. In the previous month, directors in Singapore-listed AP Oil pleaded guilty to charges of insider trading.


Reverse Psychology

Other more subtle forms of manipulation of shares include the “creation of a false market”, whereby traders artificially create the impression that a stock is more heavily traded than it really is. The ruse may at times even rely on reverse psychology of the investing public, who are made to believe in the existence of insider information.


Pump and Dump

The modus operandi of the perpetrator (commonly a house trader or syndicate) would first accumulate shares in a thinly-traded stock. At the opportune time, he would buy up a large number of shares within a short period of time in order to push up the share price. This often has the effect of luring in other investors (or rather speculators) who believe that people with inside news are mopping up the shares. The perpetrator then unloads his shares on the unsuspecting speculators.


A Possible “False Market”

It was highlighted recently in one of the online forums that shares of a particular plantation company listed on the Singapore Exchange appears to have been a target of such a scheme.


On 19 Nov, until 16:58, 2 minutes before the market would close for the day, the shares of the said company traded within a very narrow band between $0.275 and $0.28. More than 4.5 million shares had changed hands by then, more than 5 times the daily average volume in the past week.


Two minutes prior to the market closing, the large sell queues at $0.28, $0.285 and $0.29 were apparently withdrawn, allowing a series of relatively small “buy-up” trades to cause the share price to rise from $0.28 to $0.295, all within a period of 7 minutes. The share price closed at the intra-day high, also the highest in more than a month. There were no announcements made by the company that day which could have led to the price run-up.


Single-Lot Trades

On the next day, the shares of the company concerned were systematically sold down at prices ranging from $0.28 and $0.295. Furthermore, there were several instances when the last done price was $0.28 and a single lot purchase was made at $0.285, with the apparent intent to mislead speculators that there were ready buyers at $0.285.

In total, 24 million shares changed hands on 20 Nov, 30 times higher than usual.

 

What Can You Do?

As is often the case with insider trading, syndicated shares manipulation is usually hard to spot, let alone establish as a fact. The most prudent cause of action is for a small private investor to recognise the tell-tale signs of potential manipulations (such as sudden price movements, significant increases in trading volumes and single-lot trades) and refrain from trading in the affected shares. The average small investor is unlikely to prevail in such a situation.

Last Updated ( Thursday, 25 February 2010 16:20 )  
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